Published on Livewire 16/05/2022 (Original Article Here) – Ally Selby
It recently came to me that my years of dating terrible boyfriends prepped me for my journey in investment markets.
Stay with me here. But some of the key lessons that I took away from those relationships are surprisingly relatable when it comes to investing.
For instance, when it sounds like a management team (or partner) is selling you a story that doesn’t seem quite right, it probably isn’t. Or when a company (or partner) is promising massive change, but only in the future (i.e. ten years from now), it’s highly unlikely they actually will.
Another – don’t go for the bad boys, or in this case, seemingly thrilling and popular (read: over-crowded) stocks, because it is likely to only end one way (disappointment and heartbreak). Or, my favourite, when the rest of the market (your friends, family and everyone in-between) is telling you to run for the hills and ditch that stock that you think is a darling, you probably should.
Now, a few years older and a lot wiser – I realise that I should have cut my losses early (both in these relationships and with my dud stocks).
But I’ve only been investing for a few years. What do I know?
So in this wire, I’ve gathered five of the industry’s best to share the one piece of advice they wish they knew before they started investing, as well as a gauge of how bearish (or bullish) the market is right now (see below)
Marcus Padley, Marcus Today
The #1 thing Padley wishes he realised early on, is that a stock market is a business place – just like any other market.
“Everyone has an agenda, everyone is marketing and everyone is selling something,” he says.
The stock market is not there to serve individual investors and their investment needs, he adds, instead, it is there to:
- Raise risky capital for companies that might not otherwise get a bank loan.
- And it serves as a wonderful place for many businesses to charge fees for a service.
“Understand that and you will realise that as an individual investor you are on your own, there is no love, and you should handle yourself accordingly,” Padley says.
So how is Padley feeling about markets right now? Well, he says it changes from day to day. But on a scale of one to 10, where one is greedy and 10 is fearful, the market is closer to a six (mild fear).
“Tomorrow it could change,” he says.
Shane Oliver, AMP Capital
Meanwhile, Oliver believes that it’s best to be optimistic and avoid “noise” when it comes to investing.
“Like many, I spent the first few years of my career fretting about various events – like the 1986 growth slowdown, or the 1987 crash that saw shares fall 50% in a few months and the early 90s recession – and their impact on investment markets,” he says.
“It’s only when I looked back on it that I realised that it was just noise providing opportunities to invest at cheaper levels against a long-term rising trend in share markets. I realised that I should have turned down the noise, been more optimistic and simply invested more in shares at the time.”
So how is Oliver gauging market sentiment right now? Well, in the short-term, Oliver believes that markets are still at risk of further downside, given the uncertainty around inflation, rate hikes and the ongoing war in Ukraine.
“But on a 12-month view, markets will likely rise as relief on the inflation front will likely take pressure off central banks later this year, enabling recession to be avoided,” he says.
“Markets are at around eight to nine – investors are pessimistic but put/call ratios and the percentage of stocks below their 200-day moving average are not yet extreme.”
However, this also suggests markets could still go lower before bottoming, he warns.
Jun Bei Liu, Tribeca Investment Partners
For Liu, it’s all about timing.
“Timing an investment opportunity is one learning I wished I had from early on,” she says.
“As an equity investor that has been through so many market cycles, I often came across incredibly opportunities and sadly had the timing wrong and lost patience.”
With this in mind, she recommends investors clearly identify investment time horizons so that they can better take advantage of shorter term price volatility.
And while Liu believes that markets are currently between seven and eight on our investor sentiment scale (fearful but not diabolical), she’s adamant that the Aussie bourse will recover in 2022.
“Rising inflation and interest rate expectations have caused meaningful volatility across the market, particularly high growth indices such as the NASDAQ,” she explains.
“Interest rates are now rising faster than many expected and central bankers’ comments around the world have caused some alarm on how far they will go to curb inflation.”
Now, with significant rate hikes priced in by the market, Liu believes we should start to see some stabilisation in equities.
“With corporate earnings continuing to point to healthy growth and valuation reaching more reasonable levels, I think the Australian equity market will do well into the end of the year,” she says.
Roger Montgomery, Montgomery Investment Management
Montgomery’s major learning came early in his career, after working as a graduate in BT Australia’s dealing room in the early 90s.
“I was enamoured by the big personalities, the currencies, the futures, derivatives, the noise and the screens. It made the previous year, applying my accounting knowledge to the fundamental analysis of company balance sheets and cash flow statements positively boring by comparison,” he recalls.
“I remember many of BT’s most senior traders were surrounded by charts. Moving averages, stochastics, MACDs, Fibonacci lines, and Elliott Waves dominated their screens.”
Later, Montgomery would work with a tech-savvy business partner, who together, tested every popular charting tool.
“We discovered none of it stood up to quantitative analysis. I concluded that technical analysis is nonsense,” he says.
“What successful business owner comes home saying, ‘Darling, we’re selling the business because it’s gone through the technical support line’.
“Or what sensible property investor attends an auction and concludes, ‘It’s still too cheap, let’s buy it next year when it’s gone through the resistance level’. No one sells a two-bedroom apartment because the MACD has ‘crossed-over’. That’s absurd.”
So if charting isn’t practical for all asset classes, Montgomery concludes that its “not practical for any.”
“Of course, every generation rediscovers this valuable lesson. Stocks are pieces of businesses. Invest in quality businesses. Given enough time, you will do well,” he says.
So where does Montgomery think we are on Livewire’s Market Sentiment Gauge? He says exactly 7.75.
“In the US, every period of rising rates, or accelerating inflation, since the 1970s, has resulted in PE ratios compressing. The higher the rate of inflation, the greater the compression,” he says.
“This episode is therefore no different.”
A “soft-landing” is highly unlikely, given the five examples in recent history where the Fed raised rates and a recession ensued, Montgomery says. Instead, we’ve seen the Fed citing three episodes in recent history where it raised rates materially without engendering a recession.
“‘Trust us’ seems to be the mantra, despite a year ago promising inflation would be transitory, and then submitting, just six months ago, rates would remain at zero through 2022,” Montgomery adds.
“A ‘soft landing’ seems as likely as the Ukraine war ending soon… There are enough sources of negative potential catalysts that the balance of probabilities favours further PE compression and EPS growth deratings.
“Of course, this episode, which will also pass, will produce amazing opportunities that will set investors up for another decade.”
Romano Sala Tenna, Katana Asset Management
Last but certainly not least, we have Sala Tenna, who says there have been three important learnings that he would have benefitted from knowing early on in the piece.
- The power of compounding.
- The importance of a stop loss.
- Understanding my EQ.
“The first two are well known and well covered, so I’ll delve a little into the third,” he says.
“The smartest man I have met thus far on my journey (the Dux of our school and with a genuine photographic memory) tried and failed in investing – several times. It is not IQ that will determine your success in the markets – it is EQ – Emotional Quotient.”
So what is EQ? Well, Sala Tenna describes it as the ability to understand and control one’s emotions and to be able to understand the emotions of others (en masse).
Unlike our other experts today, Sala Tenna is feeling slightly more positive about the current market environment and says we are at a five out of 10 on Livewire’s scale.
“For the past 18 months, we have been writing about the need for the yield curve to rise and the resultant recalibration of equity valuations – mostly in the realm of long duration growth earnings, but to a degree across the spectrum,” he says.
“We are finally seeing this play out with a raft of bond yields across different durations and jurisdictions pushing through 3%. We, therefore, see the current recalibration of equity markets as normal and needed. Whilst we are overdue a bounce in the short term, we see that this adjustment has further to play out.”
However, every market is impacted by two factors, he adds:
- The actual conditions, and;
- How prepared investors are for these conditions.
“With US hedge funds holding the largest net shorts in four years, we see that a lot of the positioning has been enacted,” Sala Tenna says.
“So 2022 will be challenging but not diabolical. It is likely to be a year for good active managers, and a non-event for passive managers such as ETFs.”